Foreign Investors Drawn To Taiwan’s Closed-End Funds

Foreign investors are eyeing Taiwan’s 19 closed-end funds as a kind of treasure chest: if you can crack them open, the argument goes, riches lie within.

The reason is that Taiwan’s closed-end funds trade at unusually high discounts to net asset value. In the U.S., closed-end funds traded at an average 2.2 percent discount to net asset value in the third quarter of last year.

As of last month, the discount for Taiwan’s 19 listed funds often exceeded 20 percent.

If shareholders put their feet down and demand that a poorly performing closed-end fund be converted to an open-end fund, the fund’s managers must buy the shares at full net asset value. That ensures a tidy profit for shareholders.

“It’s just a matter of time before more of the funds begin to open,” said John Nelson, research manager at Jardine Fleming Taiwan Securities.

“The risk is also pretty low getting into them because the discounts are so big.”

Foreign investors like many of the funds, such as the Duo Yuan Fund and the Jardine Fleming Fund, because they represent a range of Taiwanese industries and should rise in value along with Taiwan’s overall economic growth.

New rules recently announced by the Securities and Exchange Commission also make it likely that it’ll get easier for closed-end funds to convert to open-end funds.

Under the new rules, any fund that trades at an average discount of more than 20 percent for 20 days has to call a shareholders meeting to give investors a chance to make the fund open-end. If more than 50 percent of the shareholders are present, a majority of two-thirds can demand conversion.